How does the Bitcoin Rainbow Chart work and why do traders use it?

Rainbow Bitcoin Chart is both an engaging and practical tool for analyzing long-term price movements. As of the time of this material’s preparation, BTC is trading at $87.27K, down 1.05% over the past 24 hours. The chart is based on a logarithmic scale and uses a color palette to visualize various market conditions of the asset.

History of the Tool’s Creation

The idea of the rainbow chart appeared in 2014 thanks to Reddit user “azop.” At that time, it was a simple visual tool with colored stripes on a logarithmic scale to track long-term price trends.

A significant development occurred in 2019 when crypto trader Rohmeo improved the original model. The updated version, Bitcoin Rainbow Chart V2, received a distinctive “rainbow” shape and a more sophisticated mathematical foundation for its color system. Today, this tool is available on BlockchainCenter and TradingView platforms, where millions of market participants use it.

What Signals Do the Color Stripes of the Chart Provide?

The chart is divided into nine color ranges, each signaling a specific Bitcoin valuation state:

• Dark blue range indicates extreme undervaluation of the asset
• Light blue signifies significant undervaluation and a potential buying opportunity
• Green tones (light green and standard green) show a accumulation phase with moderate undervaluation
• Yellow segment corresponds to fair market value
• Orange stripes signal early signs of overvaluation and possible market overheating
• Red shades (from light red to dark red) represent dangerous zones with a high degree of overvaluation

This color system allows both beginners and experienced investors to quickly understand the market condition without complex calculations.

Practical Application of the Chart in Trading

Using the Rainbow Chart requires a systematic approach. First, determine which color range the current BTC price is in. To do this, hover the cursor over the chart point and examine the corresponding color.

The interpretation of the result is based on a simple principle: cool tones (blue, green) indicate undervaluation and create signals to accumulate positions, while warm colors (orange, red) suggest possible prices above fair value.

Comparing the current price zone with historical data helps identify patterns in Bitcoin’s behavior in similar situations. Investors often pay attention to how the asset has behaved previously when in the same range.

The most effective approach is to combine the Rainbow Chart with additional technical indicators. Checking trading volume, RSI, MACD, and other analysis tools strengthens the trading strategy. Experienced market participants also combine this chart with the Stock-to-Flow model to create more reliable long-term forecasts.

Connection Between the Chart and Bitcoin Halving Events

Bitcoin halving occurs every four years and reduces miners’ rewards by half. This event plays a key role in the long-term price dynamics and is clearly reflected on the Rainbow Chart.

Historically, a pattern is observed: during or shortly after a halving, Bitcoin’s price is in the lower ranges of the chart, indicating undervaluation against the backdrop of historical trends. This creates a potential opportunity for long-term accumulation.

After the halving event, when the supply of new Bitcoin is limited and demand gradually increases, the price typically begins to move upward through the ranges of the Rainbow Chart. Transition from blue zones to yellow and then to orange often coincides with the development of a new market cycle. Understanding this relationship helps traders better navigate long-term cycles of the cryptocurrency market.

Advantages and Disadvantages of the Tool

The advantages of the Rainbow Chart are obvious for users of different skill levels. The color stripes provide instant visual perception of the market state without the need for complex calculations. The long-term perspective offered by the tool allows seeing Bitcoin’s evolution over years. Its simple interface attracts beginners who quickly learn to interpret signals.

However, the chart has significant limitations. It is entirely based on historical data, which does not guarantee accuracy in predicting the future. Black swan events—unexpected market shocks—can disrupt the logarithmic curve and render signals irrelevant.

The color boundaries between ranges are not rigidly fixed, allowing different analysts to have their own interpretations. The tool is not well-suited for short-term trading, as it smooths out short-term volatility. As the Bitcoin market develops and matures, historical trends may change, requiring model adjustments.

Final Recommendations

The Bitcoin Rainbow Chart provides a valuable visual tool for long-term analysis of price trends. Its color system simplifies understanding market conditions, and its historical link to halving events adds additional context.

However, it is critically important to understand that no tool has absolute predictive power. The Rainbow Chart works most effectively as part of a comprehensive set of analytical tools. Combining it with technical indicators, volume analysis, and fundamental factors offers a deeper understanding of the market. Using the chart should be complemented by constant monitoring of developments and readiness to adapt trading strategies to changing market conditions.